Once you decide you want to start selling your cookies, you'll need to start putting a dollar value on them. For many of us, this is the hardest part of being in business. Because we put our hearts and souls into our creations, we sometimes associate the price of our products with our own self-worth - "Who would pay me that much?! I'm just a beginner!" Then if someone does not respond to a quote or questions our pricing, it can be difficult not to take it personally. It's also quite difficult to put a dollar value on creative talent, skill, or reputation - all things which are not easily measurable. Lastly as creative thinkers, we'd much rather be perfecting our royal icing consistency than trying to work our way around a spreadsheet.
The good news is: pricing is a process, not a project. It's something we work on over time and get better at as we go along. Remember those first cookies you did? With wobbly lines and inconsistent icing, and a thickness that was all wrong? Compare those to the ones you do now, and you'll likely see a huge improvement. The same is true for pricing . . . you begin somewhere and get better with time. As a starting point, you need to break down the costs involved in each order, and identify the profit you'd like to make. These are the four basic elements that make up the price you quote:
- Materials costs – the costs of those things that actually go into the order. In other words, the money you've got to spend (aside from labor) to create it. This might be anything from flour to edible glitter to the box you package it in.
- Overhead costs – what it costs you to run the business itself. These are things like rent, water and power, fees and registrations, advertising costs, and so on. Home-based cookie businesses still have overhead costs to consider, although they are lower than for a storefront. If you're home-based, your family is probably absorbing a lot of these costs. Your business should be contributing in some part to those costs though, because you're using way more water and power (etc.) than you otherwise would.
- Labour costs – there needs to be someone rolling out that dough, sweeping that floor, and cutting those ribbons. For most of us, we're doing all of these jobs ourselves, but if for some reason we weren't able to do this work, we'd have to hire someone. And that someone would expect to be paid. The labour part of your costing is usually the highest cost, and sometimes we mistake it for profit, but they are not the same thing.
- Profit – this is the money you'd like to keep after the other three things have been accounted for. It's also the money you get to use to invest back into your business, in things like better equipment, classes to improve your skills, or outsourcing things like web design. Some business owners mistake being paid for their time as running a profitable business, but profit is what's left after labor and other costs have been paid. Profit is needed in order to grow the business and assist with cash flow.
Profit is often the most difficult of the four elements to grasp, because it's not as black and white as costs are; it can be more subjective. In determining how much profit you think you can make, you need to consider things like:
- the demographics of your customers,
- your area and what is currently being offered by your competitors,
- your branding, reputation, and overall business model, and
- your future business investments.
As an example, if you are a high-end specialty custom cookie-maker, chances are your pricing would be different than that of someone who owns a cookie shop where customers can purchase products out of a display.
Earlier in this article, I mentioned that pricing is a process, not a project. What this means in the real world is that, when you're starting out, you're unlikely to be paid for every single hour you spend on an order. After all, if you're learning as you're going, or moving slowly because you're new to cookie-ing, that doesn't mean the customer has to pay for all of that time. The good news is that all of the pricing elements can change as you get better at what you do. Right now, you might not be able to fully cover your labour costs or see any profit, and your materials cost may be really high. However, as you get faster, hone your skills, purchase in bulk, and increase your reputation, you'll find that materials and labour costs can go down, while your profit goes up!
As pricing can be so challenging to figure out, we often wish there was some sort of "quick guide" to pricing where numbers get plugged in and the answer magically comes out. While there are software and spreadsheets out there to help with pricing, even with them, you've still got to sit down and do some of the figuring yourself. As I often say, confidence in pricing comes from knowing the numbers. What do I mean by this? As an example, if you do the costing and find out that you cannot charge less than $5 per cookie or you'll be losing money, you'll find it's a lot easier to tell a potential client that your cookies start at $5. When we speak to a potential customer and give them a price based on what we think we're worth, that's when we start to cringe as we speak to them, or want to give them a cheaper price before they've asked for one. Doing the math and knowing the numbers will go a long way to helping you price your creations with confidence.
Some of you may have done the math and freaked out a little - your spreadsheet says you can't charge less than $5, but you've been charging $2! How do you get around that? Again, don't panic and beat yourself up over not making any money. Accept that you're starting at $2, but know that your plan is to get to the $5+ mark, and start getting there. Next time, price your creations a little higher, push yourself to work a little faster, see if you can't get some ingredients wholesale, and so on.
We all need to start somewhere, and for most of us this means undercharging at first. I'm here to tell you that's totally normal and very much a part of the learning process. Invest the time in figuring out your pricing - then adjust accordingly.
Pricing is a process, not a project.
[EDITOR'S NOTE: If you missed Michelle's last post, read it here. She's writing a mini business series for us!]
Michelle Green is the author of The Business of Baking, the blog that inspires, motivates, and educates bakers and decorators to pursue their sweet business goals.
Photo credit: Michelle Green
Note: This article expresses the views of the author, and not necessarily those of this site, its owners, its administrators, or its employees. To read more Cookie Connection business posts, click here or here.